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Pension contributions are not wages for the purposes of unlawful deduction legislation

In the recent case of Somerset County Council v Chambers, the EAT has ruled that contributions to a pension scheme did not come under the definition of “wages” when determining whether an employer has made an unlawful deduction from an employee’s wages under the Employment Rights Act 1996 (“ERA”).

Mr Chambers had previously been a full-time employee of the Council prior to his retirement in 2003. Following his retirement, he re-commenced employment with the Council as a locum social worker, working around one-third of normal full-time hours. Mr Chambers was initially permitted to contribute to the local authority’s pension scheme during this time, and contributions were also made on his behalf by the Council. However, some years later, the rules of the pension scheme were changed, such that only those employees employed on a contract of duration of 3 months or more could contribute to the scheme. The Council regarded Mr Chambers as a casual worker, not an employee, and ceased making pension contributions on his behalf. Mr Chambers was in fact later reinstated into the scheme but was ultimately held to be ineligible and his contributions were refunded to him. Mr Chambers raised a claim that his employer had made unlawful deductions from his wages by virtue of ceasing to make employer contributions to the pension scheme. He also made additional claims in relation to his rate of pay and holiday pay.

The Employment Tribunal held that Mr Chambers was an employee of the Council and therefore had suffered an unlawful deduction from his wages, in the circumstances described, under the ERA.

However, the EAT held that the issue of whether or not Mr Chambers was an employee or not was not the correct question (as the provisions under the ERA apply to workers and employees alike).

The EAT instead referred to the wording of the provision for unlawful deduction from wages which makes clear that “wages” mean any sums payable to the worker in connection with his or her employment. The EAT held that this does not include contributions paid to a pension provider on the worker’s behalf.

Impact for employers

This case serves as a useful reminder to employers that the provisions prohibiting unlawful deductions from wages are not exclusive to “employees”, but also protect “workers”. This includes any individual who has entered into a contract “to do or perform personally any work or services" (unless the individual is carrying on a business and the other party to the contract is a client or customer). There is no qualifying period of service required in order to bring such a claim.

However, the EAT has made clear that payments made by an employer to a pension scheme on a worker’s behalf do not fall within the definition of “wages” under the ERA. The cessation of employer pension contributions could give rise to a potential breach of contract claim by an employee (either in respect of any express contractual provision under which the employee is entitled to receive contributions at a certain level or, in certain cases, in respect of the implied duty of trust and confidence between employer and employee). However, the cessation of employer pension contributions will not amount to an unlawful deductions from wages.